Headline Inflation To Average Well Above 6% In Second Quarter: RBI Article

The State of the Economy article also noted that the inflation surged to a 15-month high in July to 7.44 per cent and the that the incidence of supply shocks is not over. 

The RBI Bulletin article said that the vulnerability of the economy to the recurring incidence of vegetable price shocks, especially ahead of and during the monsoon, warrants major reforms in perishable supply chains.

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Headline inflation is expected to average well above 6 per cent in the second quarter of the financial year 2023-24, said an article in the Reserve Bank of India's (RBI) monthly bulletin, on Thursday. The State of the Economy article, co-authored by RBI Deputy Governor Michael Patra, also noted that the inflation surged to a 15-month high in July to 7.44 per cent and the that the incidence of supply shocks is not over. 

It should be noted that the views expressed in the Bulletin articles are of the authors and do not represent the views of the RBI.

"Inflation fell from its peak of 7.3 per cent in Q1 FY23 to 4.6 per cent in Q1FY24. This 270 basis points (bps) decline in inflation was mainly due to the waning of supply shocks. The impact of monetary policy actions is gathering potency, accounting for around 130 bps of the decline of inflation. The contributions of other factors more or less offset each other," the article said. 

"The uptick in inflation in its June reading mutated in July, with the unprecedented shock to tomato prices spilling over to prices of other vegetables. In the event, headline inflation surged to a 15-month high in July, exacerbated by a month-on-month (m-o-m) increase of 4.3 per cent in electricity prices. Notably, however, core inflation eased in July, extending a softening bias that set in from February 2023. The incidence of supply shocks is not over - elevation in vegetable prices has extended into the first half of August. Accordingly, headline inflation is expected to average well above 6 per cent in the second quarter," it further added. 

Food commodity prices in India has been rising in the last few months especially, of tomato and essential grains. 

The RBI bulletin said, "The spike in tomato prices and further increase in prices of cereals and pulses have contributed to this. Consequently, a substantial increase in headline inflation would occur in the near term."

The RBI bulletin article said that the vulnerability of the economy to the recurring incidence of vegetable price shocks, especially ahead of and during the monsoon, warrants major reforms in perishable supply chains covering transportation networks, warehousing, and storage technologies, and value-addition processes that damp the amplitude of these swings.

It further warned, "The shadow of El Nino looms over the second half of the year and the outcome for food inflation in the rabi season. Yet another upside risk is the outlook on crude oil prices that is marred by ‘engineered’ supply shortfalls. There is a diminishing probability of crude price pressures easing over the rest of the year."

On August 10, the RBI modified its inflation projection for 2023-24, hiking it by 30 basis points to 5.4 per cent. 

The article also said that going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressure on the near-term headline inflation trajectory. This jump is, however, likely to correct with fresh market arrivals. There has been significant improvement in the progress of the monsoon and kharif sowing in July; however, the impact of the uneven rainfall distribution
warrants careful monitoring.